Unveiling the Myths of IRAs - How to Take Control of Your Retirement!

In today's show, we're going to talk about common and costly IRA mistakes. Tax-advantaged retirement accounts, of course we're talking about IRAs, they can sometimes be tricky to navigate, at least two mistakes. There's a lot to know about these accounts, especially when it comes to taxes. Products can vary, and when it comes to variations, details can be overlooked, sometimes missed. Don't worry, I'm going to illuminate these blind spots and help you make the right decisions for your situation. Stay tuned.

Welcome to another edition of We're Talking Money. I'm Phil Clark, founder and CEO of OmniStar Financial Group. There's a lot to know when it comes to navigating the financial landscape. In fact, it gets more complicated every year. Now, helping you simplify, I'm going to cover some of the most common misconceptions about IRAs. Let's get started.

The first misconception is that an IRA is an investment. The fact is, an IRA is not an investment, it's a type of account. Terminology is subject to interpretation, the devil gets in the details, and this one is no exception. In fact, the term IRA, or individual retirement account, and brokerage accounts are often used interchangeably, but they're not interchangeable. The individual retirement account, or IRA, it's not an investment account at all. It is a type of registration, however, that affords the investor certain tax benefits, all aimed at retirement.

Here's where it gets a little confusing. Now, many types of accounts can be registered as an IRA. For example, you could go to your bank and buy a certificate of deposit, have it registered as an IRA, and voila, you've got an IRA that is basically using a CD as the investment. It can also be applied to a brokerage account, which now you would have numerous investment options: maybe CDs, stocks, bonds, mutual funds, ETFs. Even more confusing is annuities. They can be titled as an IRA. Annuities are already tax deferred, so in my opinion, it rarely makes sense to use a tax-deferred annuity to serve as an IRA, which is also tax deferred. You can only defer the taxes one time, so using the annuity, I think it's nonsensical.

The second misconception that we want to talk about is, I can only have one type of IRA. That's not true. The fact is, you're eligible and you can contribute to different types of IRAs. Most everyone can do this. Contributing to a Roth IRA and a traditional IRA, it's absolutely allowed as long as you're eligible. That's the key, because it goes together. You can't fund both of them at the maximum amount, but you can do them in aggregate to reach the maximum amount.

Now, in 2023, the contribution limits are sixty five hundred dollars if you're under age 50, and if you've reached age 50, then it's 7 500. So you get a one thousand dollar catch-up contribution if you're over 50. Now, our tip is to first learn how much you can contribute and decide which IRA might be right for you, and that means you're gonna have to take a look at your tax situation to decide if Roth or traditional makes more sense.

The third misconception is you cannot contribute to a 401k and IRA in the same year. That's not true. The fact is, you can contribute to a 401k and an IRA in the same year if you have a taxable, or rather, taxable compensation. In other words, if you're earning a paycheck, you can contribute to a traditional IRA. If you and/or your spouse is contributing to a workplace retirement plan like a 401k and your income is above certain levels, you cannot deduct it. So that's what changes here. That's where the rule gets a little bit misleading, if you will. So it's not that you can't contribute, it's the ability to deduct. So deducting your traditional IRA contribution may be limited or eliminated, but it doesn't mean you cannot contribute.

Now, with the Roth IRA, your contribution is made with after-tax dollars, meaning you don't get an immediate tax savings. But the huge benefit here is your money can now grow federally tax-free, and your withdrawals are tax-free. By the way, that's federal and state tax free. So eligibility to contribute to a Roth IRA, just like the traditional IRA, it doesn't depend on a retirement plan at your work for you or your spouse. Please keep that in mind. If your adjusted gross income, or I should say your MAGI, your modified adjusted gross income, is below the annual limit and you have taxable compensation equal to or greater than your contribution, you can absolutely contribute to a Roth IRA.

Misconception number four: you cannot withdraw money from your IRA until you reach age 59 and a half. The fact is, there happens to be some options for penalty-free withdrawals before age 59 and a half. Unfortunately, many people become resistant to save when they believe that their money is going to be penalized should they need it. And it is true that there is a 10 early withdrawal penalty that's levied on any withdrawals taken from an IRA before age 59 and a half. As I said, there are some exceptions to that rule. Taxes will be due on withdrawals of a tax-deductible contribution and withdrawals of earnings on any contributions, but the 10 percent penalty can be avoided for a few reasons.

Let's talk about what they are: up to ten thousand dollars for qualified first-time home buyers, or first-time home purchases; qualified higher education expenses; health insurance, health insurance premiums, so long as you're unemployed; total and permanent disability; withdrawals by beneficiaries of an inherited IRA; qualified birth or adoption distribution. Roth IRAs allow for the same penalty-free exceptions, so either or, these exceptions are available to you.

So if someone tells you that you cannot withdraw funds from an IRA before age 59 and a half without tax and penalty, tell them they're wrong. There are certain exceptions that allow you to make such withdrawals. Now, we don't encourage those withdrawals, but it is your money, and if you need it, these are the ways that you might be able to access that money before age 59 and a half.

Our fifth misconception, and this one is so important: beneficiaries listed on financial accounts, they can be a critical piece of your estate planning, and it is very important to keep them updated. This one sort of falls through the cracks, and people miss this one because they think their will will take care of it, or their trust. For many people, retirement accounts will make up or represent their greatest asset. In some cases, it might be the bulk of their life savings, certainly a sizable part of the estate.

When you assign beneficiaries, it is one of the easiest and most important, effective estate planning steps that you can take. That's because the beneficiaries named on financial accounts, like an IRA, a workplace savings plan, so your 401k, insurance policies, brokerage accounts, typically those beneficiary designations trump any instructions that you may provide in a will. Even better, most of these programs bypass the costly and often cumbersome probate. Taking the time to make sure your beneficiaries are listed enlisted correctly may help provide peace of mind that you're doing everything you can to provide for your future and that of your loved ones.

I hope this edition of We're Talking Money has inspired you to take a closer look at your savings programs for retirement and to better understand which vehicles are best for your situation. If you enjoyed today's content, please like, share, and consider subscribing to our channel, and don't forget, ring that bell so you never miss an episode. I'll see you next time when We're Talking Money.

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